A man walks out of the Nairobi Stock Exchange in Kenya's capital Nairobi
A man walks out of the Nairobi Stock Exchange in Kenya's capital Nairobi March 4, 2010. REUTERS

Yields on the reopened Kenyan two-year Treasury bond are expected to jump beyond those on short-term Treasury bills, given the anticipated hike in the central bank's benchmark rate on Wednesday, traders said.

The 10 billion shillings two-year paper at an annual coupon rate of 10.5 percent was heavily undersubscribed two weeks ago, after it attracted yields at 13.897 percent at the previous auction.

Analysts expect the central bank to raise its main rate during the next Monetary Policy Committee (MPC) meeting on October 5, just three weeks after a special meeting raised the benchmark by a modest 75 basis points.

"Investors are looking at the shortest possible tenure, which is the 91-day. I don't think there is any investor who would prefer to be paid less on a bond, compared with a T-bill," said James Chweya, a trader at Standard Chartered.

The 91-day Treasury bills attracted the highest yields this year at 13.741 percent, and it was heavily oversubscribed, while the 2-year paper received a 43 percent subscription rate.

"I don't understand why they (central bank) had to accept only 600 million shillings, making the rate move 127 basis points. If that is a signal to go by, then we expect the same kind of move, upwards, in the next auction."

Traders said the anticipated rise in the Central Bank Rate (CBR) would hit the fixed income market, leading to higher cost of domestic borrowing for the government.

Fixed income traders said investors were also factoring in double-digit inflation, now at 17.32 percent, while bidding, further pushing yields up.

Bidding for the two-year Treasury bond will open on Wednesday, while the auction will be on October 25.